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This is a guest post from FrugalTrader, who blogs about personal finance from a Canadian perspective at Million Dollar Journey.

In 2003, my girlfriend (now wife) and I graduated from university with nearly $50,000 in debt. This debt was a combination of my wife’s $30,000 in student loans and her $20,000 new car loan. Since I learned fundamental saving habits at a very young age, I managed to graduate university debt-free with $10,000 in savings. Combined, however, we were $40,000 in the red (not including a new mortgage). 

Over the past five years, our financial picture has changed drastically.  Not only have we dug ourselves out of the hole, but we’ve grown our combined net worth to over $285,000. 

How did we do it? We didn’t strike it rich in real estate, we didn’t luck into some crazy stock tip, and we don’t even have extremely high paying jobs (we started at $85,000 gross combined).  Instead, we systematically controlled our spending so that our expenses were well below our income.  We then took the savings and aggressively paid down our debts while at the same time investing for our retirement. 

Here’s how we did it:

  1. We minimized our housing costs. We used my $10,000 in savings as a down payment and purchased an income property where we could live in one unit and rent out the other.  The rental income from the other unit helped pay for most of our mortgage expense.
  2. We paid ourselves first. Upon graduation, we set up our bank accounts to transfer at least 10% of our take-home pay to a separate high interest rate savings account.  As this account grew, it was separated into an emergency fund, lump-sum debt payments, and retirement lump-sum contributions.  Any money left over in our regular account after paying bills (and discretionary spending) was used to either invest or pay down debt.
  3. We lived well below our means. We followed The Wealthy Barber philosophy of separating our wants and needs. This simply means that before you purchase something, you ask yourself a question: “Is this item a want or a need?”. We try to limit our purchases to “needs”. Following this rule saves us around 15-20% of our take-home pay.
  4. Any additional money was saved. As our combined salaries increased over the years, we’ve kept our lifestyle the same, which has resulted in greater savings.  In addition, tax returns or any other “free” money is re-invested or saved.  Lately, we’ve been saving up to 30% of our take-home pay.
  5. We aggressively paid down debt.  We used our savings to pay down our student- and car-loan debt, while at the same time investing money in our retirement accounts.  We paid off our student loan debt in late 2005, and completed the car payments in early 2007.
  6. We invested our savings for the long term. Along with maximizing our retirement contributions, we kept our eyes open for investment opportunities.  In 2005, we came by a great deal on a single-family home, and picked it up at a steep discount relative to other homes in the area.  We still earn rental income on this home.

Using these six steps, we have turned our financial situation around. We currently have no student or consumer debt, and have grown our net worth to over $285,000. My wife and I now aim to have $1 million in net worth by the time we reach the age of 35 (we’re 28 now). Whether your goal is to get out of debt, obtain passive income, or to achieve great wealth, the key is to set your goals, create a plan and stick with it.

For those of you who follow my blog, you know that we have recently upgraded our lifestyle with a new house. Even so, we kept our mortgage expense fairly low relative to our income by putting a large down payment on the home. Other than that, we still pay ourselves first and invest aggressively.

Photograph by jenn_jenn.